Sub-contractors not a ‘permanent establishment’

The Authority for Advance Rulings (AAR) has held that work independently performed by an Indian sub-contractor in its own factory does not represent a permanent establishment (PE) of a foreign company under article 5(2)(i) of the India-Germany tax treaty.

Pintsch Bamag, a German construction company, was awarded a contract by the Tuticorin Port Trust to design and install a navigational channel and fairway buoys for the Sethu Samudram ship channel project. Pintsch Bamag sub-contracted a major portion of the job to an Indian company, Asia Navigation Aids, and entered into supply contracts with other Indian companies.

Pintsch Bamag contended that it had no PE in India, as the staff it sent to India to work on the contract was there for only two months (at the time of installation and commissioning). This lay outside the time requirement of six months specified in article 5(2)(i). The tax authorities contended that the time resident in India should be calculated to include the activities of Asia Navigation Aids, which was performing tasks central to Pintsch Bamag’s contract work. They also argued that the sub-contractor’s workshop should be treated as part of a PE of the contractor. Such a definition would bring the duration of the contractor’s work in India well beyond the stipulated six-month threshold.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.